Monday, October 19, 2009

No Safe Way Down

Recently, Mr and Mrs T nearly traded up to a new house. It came on to the market in early summer and the Tylers made what they considered to be a most reasonable offer in these post-apocalypse days - to wit, 16% below the asking price.

The offer was rejected outright. The owners said at that price, they'd rather not sell at all.

Several months went by, and no other offers emerged. To show willing, the Tylers even nudged up their own offer a few percent. But the sellers remained adamant - our price or no price.

Which was really rather odd, given the property's price history. Because our researches on Mouseprice had immediately revealed that the owners had pitched their price 35% above what they themselves had paid just four years ago. Whereas the overall price increase for the general area had been less than 5% (a BIG UP followed by a BIG DOWN). Sure, they'd made one or two improvements, but nothing like enough to account for the difference.

So the Tylers decided to sit tight and let the mortgage famine do its work on the sellers.

Then, guess what - all of a sudden, another offer appeared, very close to the asking price. "Are they good for the money?" asked Tyler of the agent. "Oh yes, that's not going to be a problem - they're currently in a rental and he's in the City", the agent smirked. The Tylers politely declined the invitation to counterbid.

So there we are. The City is back in bonusland, and the housing market is back on the razz.

According to Rightmove, property asking prices are surging again. Fueled by bonus talk, London prices are now actually higher than they were during the 2007 peak. Which sounds absolutely stark raving.

WTF's going on?

You don't really need me to tell you, but I will anyway.

The lowest interest rates since the dawn of creation is what's going on. There is zero incentive to hold savings in cash and the money is rushing back into property.

And not just property of course. Money is also scrabbling back into the equity markets (eg unit trust sales are right back up). The FTSE is up 50% from its lowpoint and back to pre-crash levels.

Now, as regular readers will know, we are very concerned about all this - and not just because the Tylers lost their new house. It's all very well slashing interest rates and printing money in the immediate face of a meltdown, but how is the Bank of England going to get us back onto a sustainable footing? How is it going to find a safe exit? And how do we avoid a return to 70s style inflation?

In this morning's FT there's an excellent article by Wolfgang Münchau asking the same questions. Noting that the current run-up in asset prices has all the hallmarks of another bubble, he says:

"Our present situation can give rise to two scenarios – or some combination of the two. The first is that central banks start exiting at some point in 2010, triggering another fall in the prices of risky assets. In the UK, for example, any return to a normal monetary policy will almost inevitably imply another fall in the housing market, which is currently propped up by ultra-cheap mortgages.

Alternatively, central banks might prioritise financial stability over price stability and keep the monetary floodgates open for as long as possible. This, I believe, would cause the mother of all financial market crises – a bond market crash – to be followed by depression and deflation.

In other words, there is danger no matter how the central banks react. Successful monetary policy could be like walking along a perilous ridge, on either side of which lies a precipice of instability.

For all we know, there may not be a safe way down."

No safe way down.

Hmm.

Don't like the sound of that.

Although we do take some comfort from the fact that whichever of Münchau's two precipices we plunge down, the Tylers will be better off without their new house. May the Lord have mercy on its new winner's-cursed owners.

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